Forex Market Commentary
Commercial banks rule the currency markets.
The plunge in the EUR/ USD initiated by specs halted with commercial bank buying across the board. The USD is not going to launch on an upward trajectory with massive velocity in 2016 with large specs pushing steam like they did last year. Dollar volatility will slow down in 2016 and eventually the US Dollar will run out of steam as 50 basis points becomes the ceiling on rates as US GDP slows down as corporate earnings of US manufacturing and retails comes down.
Factor 1 - November NFP was a whopping 91k actual over forecast. However, a law of diminishing returns has to set into the labor markets. This type of incremental growth is not sustainable when an economy is already running at near 5% unemployment and technically speaking running at 'full employment'. You just cant grown and keep on growing forever. This is not a beanstalk. The law of diminishing returns has to set in and US GDP growth will eventually slow down in 2016 largely in part to the high value of the USD which is hurting the energy sector and manufacturing sectors badly Therefore the USD is not going to go forwards in leaps and bounds,; rather tiny spurts and zigs and zags.
Factor 2 - 25 basis points is passe; doesn't even cause a ruffle in the equities markets anymore. Not even talk of 50 basis points to rear in headline inflation at 1.9%. Corporate chieftains do not swoon any more with hysterics. What on earth is the US Fed waiting for unless it fears pushing the US markets into a recession? Yes, US manufacturing and exports is bleeding and the energy sector wobbling badly. A 50 basis points increase and revaluation of the Dollar upwards by a mere 5% can throw the US export sector into turmoil. So USDX at 101 and EUR/ USD at 1.05 pretty much accounts for a 50 basis points rate in US markets. So there is NO NEW NEWS. So the big question is looming ahead for the US Fed: how can we stop the upward trajectory of the US Dollar even after a 50 basis point hike and help the Euro zone, China and Japan inflate their economies to take pressure off the US Dollar and narrow the divergence in respective economic growth. Specs looking to tweak commercial interest in buying and selling currencies already know that the US Fed is losing manoeuvre room and so big leaps in value is not a logical probability.
Factor 3 - Commercial banks run this global currency market and large speculators tweak it from its equilibrium and exploit the rumor mill with the old adage of buy into the rumor and sell the fact. The large move in the NFP did not move the EUR/ USD further than 1.0840 to 1.0706. Swing traders looking for candle stick chart interpretation would have liked to have seen a bearish engulfing pattern emerge on monday or dark cloud cover but it didn't happen; after a 100 pip move the key to understanding direction is watching the next day session and today we had a bullish retracement to suggest thhat the push to 1.07 was not welcome. It's too early for a push to 1.05 so this is a probe. The move was half-hearted and today the follow thru was mute. Swing traders take note of the lack of action in the Euro session in particular. Whilst the ECB doesn't want the Euro currency north of 1.10 equally commercial banks are going to keep buying euro currency for their customers at the 1.05. There are two possible scenarios which depend upon the ECB QE program. Firstly, an extension of QE thru 2016 without tapering off by December 2016 will send Euro interest rates into negative yields and push the EUR/ USD to the 1.00 - 95.00 trading band at the very very bottom of the interest rate cycle of the Euro zone, give that US rates stand at a ceiling of 50 basis points thru 2016. Scenario two, with a tapering starting in Q3, coupled with inertia in US rates after 50 basis points, should see a sturdy defence of EUR/ USD at 1.00 - 1.05. I believe scenario two is more apt as the credit bubble problems the US experienced was not as great as in the Euro zone. I would forecast the rate divergence maintain at 50-60 basis point spread for at least Q1 Q2 2016 and a trading range 1.00 -1.05 with stout commercial bank buying. Swing traders on the EUR/ USD would have their work cut out to book 100 pip moves next year. A much better strategy would be writing options and booking premiums in markets which narrow into a sideways slugging match.
The volatility of EUR/ USD grew on the back of the Grexit talks and China crisis for 2016 as well as the uncertainty over the birth of the ECB QE. Remove all three of these factors for 2016 and we should see a much less volatile currency pair.
In speaking of moving averages; markets are not rational and daily price action volatile, but in the longer run trader expectation and negative sentiment can be collectively summed up through the 50 day moving average. Always look to support and resistance band lines as the key to understanding in the long and short term where prices are converging. Professional technical traders use 50 day and 200 day medium and slow moving averages as fundamental cornerstones for interpreting the direction of price action.
USDX
US Dollar
99.005 -0.003 -0.00%
Support 97.848 Resistance 101
Forward 1 year - 101.67s.
99.005 -0.003 -0.00%
Support 97.848 Resistance 101
Forward 1 year - 101.67s.
EUR/ USD
1.075205 -0.001300 -0.12%
Support 1.06107 Resistance 1.09987
Forward 1 year - 1.0990s.
1.075205 -0.001300 -0.12%
Support 1.06107 Resistance 1.09987
Forward 1 year - 1.0990s.
Crude Oil WTI
44.10 +0.23 +0.52%
Support 43.30 Resistance 46.40
Forward 1 year - 47.27s.
Forward 1 year - 47.27s.
Gold
1092.320 -1.470 -0.13%
Forward 1 year - 1,101.0s.
Pieter Bergli - DeLoren Trust Holdings
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